Does MMA Capital Management LLC’s (MMAC) PE Ratio Signal A Buying Opportunity?
MMA Capital Management LLC (NASDAQ:MMAC) is trading with a trailing P/E of 6.5x, which is lower than the industry average of 19.6x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for MMAC
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for MMAC
Price-Earnings Ratio = Price per share ÷ Earnings per share
MMAC Price-Earnings Ratio = 25.1 ÷ 3.842 = 6.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as MMAC, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 6.5x, MMAC’s P/E is lower than its industry peers (19.6x). This implies that investors are undervaluing each dollar of MMAC’s earnings. As such, our analysis shows that MMAC represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy MMAC immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to MMAC. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with MMAC, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing MMAC to are fairly valued by the market. If this is violated, MMAC's P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of MMAC to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If you are considering investing in MMAC, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on MMA Capital Management for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
